A principle that was the cornerstone of FERC’s landmark gasrestructuring rule, Order 636, is absent from Order 888 and is atthe root of many of the reliability problems in the bulk powermarket, say industrial power customers and a utility/marketer.

The Commission recognized “so astutely” in Order 636 thatcomparability of service and pricing for similarly-situatedcustomers was the “linchpin for overcoming both competitive andreliability challenges” in the natural gas industry, saidaffiliates Dynegy Power Marketing, Dynegy Power Corp. and IllinoisPower Co. That “piece of the puzzle,” however, is missing from thewholesale power market.

Order 636, which came out in 1992, “engineered…..acomprehensive retooling of the natural gas market,” givingcustomers access to sufficient supplies of gas at reasonableprices, the Dynegy affiliates said; but that wasn’t so in Order888. FERC “cannot postpone any longer the implementation (or atleast a fuller discussion)” of initiatives to assure similar accessand sensible prices for electric customers, they noted.

Likewise, the Electricity Consumers Resource Council (ELCON),the American Iron and Steel Institute and the American ChemistryCouncil (Industrial Consumers) believe FERC “should go beyond merebehavioral rules for checking the discriminatory conduct oftransmission owners by adopting the electricity equivalent of Order636…”

Specifically, the Commission should “respond affirmatively” to aMarch 1998 filing in which petitioners proposed that FERC “divorce”regulated transmission owners from their affiliated merchantoperations, forcing the merchant facilities to “seek and obtaintransportation pursuant to identical rules…..that govern allother shippers,” the Industrial Consumers said.

Imposing this Order 636-like strategy in the electric industry”is even more essential because the degree of vertical integrationof the incumbent utilities makes the incentive and opportunity todiscriminate much greater than it was in the less-integratednatural gas industry,” the group noted. “FERC must undo many of theconsequences of 65 years of regulation for real competition toemerge” in the wholesale power market.

The Dynegy and ELCON comments were in response to theCommission’s two-part request in May for industry suggestions onshort- and long-term initiatives for enhancing the reliability ofthe power grid. Industry filed comments at FERC on ways to improvereliability in the short term in early June, while the deadline forproposals addressing long-term reliability was a week ago[EL00-75].

Dynegy and ELCON cautioned the Commission against looking toregional transmission organizations (RTOs) as a cure-all forreliability problems. RTOs “are not the panacea to the industry’sills…..[E]ven if the Commission mandated RTO formation, it wouldstill fall well short of addressing the market disparities and thefundamental inequities resulting from the lack of comparable accessto transmission service for all market participants,” the Dynegyaffiliates noted. For instance, they said RTOs would do little tostop transmission owners from hiding their “discriminatory behaviorbehind the cloak of native load.”

FERC’s prior policy on independent system operators (ISOs) andits voluntary rule on RTOs are failing, contends ELCON.”Reliability problems (and irrational pricing conditions) are justas (if not more) endemic of existing ISOs than regions that are notserved by ISOs.”

In a white paper filed at FERC, the Electric Power SupplyAssociation (EPSA) cautioned the Commission against letting RTOsactively involve themselves in competing generation markets, sayingthis could further jeopardize the “reliability and stability” ofthe markets in the long term. RTOs should stick to operatingtransmission systems in a reliable, non-discriminatory manner, thegroup said.

Unfortunately, however, nearly all of the existing ISOs – theCalifornia ISO, the PJM Interconnection, the New England ISO andthe New York ISO – “have shown that they are inclined to take on asignificant role in power markets, which can preempt private marketdevelopment,” the group of energy suppliers noted. Theirintervention is mostly seen in the form of price caps ongeneration, EPSA said.

Every operational ISO has invoked price caps this summer. “Pricecaps mute price signals that would generate capital to buildgeneration. Indeed, the mere rumor that the Commission wasconsidering national price caps for generation a few weeks agocaused an almost $8 billion exodus in capital from generator stocksin two days,” the Dynegy affiliates noted. Dynegy stock was amongthose affected by the rumor.

While FERC has given industry “some guidance” on the issuesinfluencing reliability, “some of it is dated, some of it issketchy, and some of it is unclear and subject tomisinterpretation,” the Dynegy affiliates said. “Fortunately,however, serious (and surprisingly candid and progressive)discussion on these issues is taking place as market participantsmeet to decide their RTOs. Indeed, momentum is growing in someparts of the industry to move decidedly away from contract path,after-the-fact pricing [for transmission] and to a model wherepower can be bought and sold in a forward market through the use ofhedging tools that provide price certainty. These discussions areoccurring largely without the benefit of Commission participation.”

Susan Parker

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